IRS Issues New Report on EITC Overclaims (Title A)

or Billions in Fraud and Errors Continue to Plague EITC (Title B); or Unenrolled Preparers With Higher EITC Error Rates than Other Preparers (Title C)

Last week IRS released its most comprehensive report on EITC compliance in over a decade. Called Compliance Estimates for the Earned Income Tax Credit Claimed on 2006-2008 Returns, the report reviews dollar overclaim percentages, which is defined as total dollars overclaimed as a percentage of total dollars initially claimed for EITC prior to IRS enforcement. Those interested in the EITC should read the report. It discusses variables that correlate to higher or lower rates of noncompliance, the main sources of EITC errors by frequency and dollar impact, and the differing compliance rates according to type of preparer. It also details some of the major legislative changes to the EITC since 1999, and notes some interesting trends for periods after 2008, including a substantial decline in the reported use of commercial preparers among EITC claimants.

The bottom line from the report is that the 2006-08 results do not differ materially from the most recent prior EITC compliance study that looked at 1999 taxpayer claims. Yet, the growth in the EITC program overall means that similar overclaim rates lead to many more dollars that are improperly claimed, thus likely generating posts or articles reflective of Title B. Interestingly, the report also shows that error rates are higher among returns prepared by unlicensed preparers relative to other paid preparers, self-prepared returns and VITA returns. That will likely lead some to frame the 2006-08 Report in line with Title C.

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How Much Was Overclaimed?

Taking into account differing estimates to reflect different assumptions for the taxpayers who failed to participate in the audit, the 2006-08 EITC study estimates that the overclaim percentage as 28.5 percent (lower estimate) and 39.1 percent (higher estimate). The two figures, the lower and higher estimates, reflect differing assumptions for the approximately 15 percent of taxpayers who failed to participate in the EITC audits that comprised the National Research Program study that is the backbone of the report. The 1999 estimate comparable figures were 30.9 percent (lower estimate) and 35.5 percent (higher estimate).

Opponents of transfer programs generally and IRS bashers will focus on the rates of noncompliance and the dollars at issue—while the overclaim rates have not changed much from 1999, because of the growth in the EITC since 1999 there is a marked increase in total dollars claimed and thus overclaims since 1999. Looking at averages from the three years in this study, IRS estimated that in 2006-08 23.7 million taxpayers claimed an annual EITC total $49.3 billion, compared with 18.8 million taxpayers claiming a total EITC of $31.3 billion in 1999. As a result of the EITC program growth the total overclaims in the study are higher in the 2006-08 Report than in the past 1999 study, with annual overclaim estimates for 2006-08 at $14 billion (lower estimate) or $19.3 billion (higher estimate), compared to 1999 figures of $12.3 billion (lower estimate) and $14 billion (higher estimate). This could very well serve as the justification for what I refer to above as Title B to this post.

Depending on one’s perspective, there are differing ways of framing the overclaims in the 2006-08 EITC Report. EITC proponents will note that the overclaim estimates may overstate the true cost of incorrectly claimed EITC. For example, the compliance estimates do not reflect individuals who were eligible to claim the credit but who failed to do so, nor do the estimates account for offsetting errors, where, for example, one parent may have erroneously claimed the EITC but another family member may have been eligible instead. Moreover, EITC proponents may note that the EITC overclaim estimates still are much lower in terms of overall impact on the tax gap, such as small business income underreporting.

Preparer Usage and Overclaims By Type of Preparer

In discussing the justification for the IRS’s now stalled efforts to impose mandatory testing and education requirements for unenrolled preparers, in my post IRS Regulation of Return Preparers: April 15 Edition I have previously referred to the National Taxpayer Advocate’s testimony that suggested that the NRP results that are the guts of this report showed higher EITC overclaim rates for unenrolled preparers relative to licensed preparers. In response to that testimony and my post on the topic, Loving litigator Dan Alban in his post on Procedurally Taxing called Loving Victory is Final and Why That is a Good Result for Taxpayers and Preparers stated that he wanted to see “the full set of figures” not just the NTA’s “cherry-picked excerpts.” In addition, Mr. Alban and others pointed to TIGTA mystery shopping scenarios of VITA sites to argue that licensing and testing may not have the desired regulatory effect.

Well, the report offers more data on preparers and the EITC:

Twenty-nine percent of EITC claimants self-prepare their returns, compared with 43 percent of other taxpayers. Roughly 68 percent of EITC claimants have their returns prepared by a paid third party, with another 3 percent relying on free tax return preparation services offered by the IRS or IRS-sponsored programs. Unenrolled return preparers are the most common type of preparer chosen by EITC claimants; 26 percent of all EITC returns, and 43 percent of paid preparer returns are prepared by an unenrolled return preparer.

Table 9 from the report adds some more to the picture, and provides a breakdown of overclaims in EITC returns by preparer type(sorry for the break in page and quality; those wanting the original table can go to page 26 of the report):

Table 9 is interesting; national chains look good, with overclaim percentages estimated to be at 20 percent (lower) or 30 percent (higher). In contrast, the dollar overclaim percentage for returns prepared by unenrolled return preparers is estimated to be 33 percent (lower) or 40 percent (higher). Volunteer returns have even fewer overclaims. As IRS states, “although comprising only 3 percent of all returns with EITC, returns prepared by volunteers in the IRS-sponsored VITA and TCE programs have the lowest error rates. Among these returns, the dollar overclaim percentage is estimated to be 11 percent (lower estimate) or 13 percent (higher estimate).”

What to make of the above? I would like future compliance studies to tease out the differences within the categories of preparers. For example, there is little distinction made within the preparer categories (e.g., do franchise owned national preparer offices have overclaim rates that differ from company-owned offices? Does experience or location of a CPA or enrolled agent correlate to differing overclaim rates? Do returns from preparers that operate as sole practitioners have differing overclaim rates than those in medium or large-sized practices?)

There are other limitations as well. As IRS notes, the difference in overclaim rate by type of preparer may be accounted by factors independent of preparer competence or scruples, such as taxpayer selection bias. In other words, the difference may be attributable to noncompliant taxpayers seeking out certain types of preparers, rather than preparers influencing taxpayers. To be sure, the results may be attributable to preparers whose competence or scruples led to or at least facilitated the overclaims. The study does not attempt to characterize the causes, a shortfall that maybe the IRS can take up in future qualitative research studies. Without knowing why the differences exist, those skeptical of additional IRS oversight will argue that the results do not justify the added costs to taxpayers and preparers that come from additional preparer regulation. At a minimum, given how much can be saved by moving the overclaim percentages down even a few percentage points, the differences in overclaim rates justify additional attention to preparers who prepare returns that are more likely to be incorrect and taxpayers who choose to use those preparers.

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Comments

I am partly skeptical of these statistics as regards people who write on their returns that they were “self-prepared”. As the director of a low-income taxpayer clinic, I was constantly having people come in with returns that said on their face that they were “self-prepared”, but the client told me otherwise (which, given the client’s lack of knowledge of how to read the forms, seemed highly credible).

As the Right complains, yet depletes the IRS budget which in turn, reduces compliance audits. And as the article states, it’s but a fraction of small business non-compliance. And Corporate non-compliance.

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Leslie Book

Keith Fogg

T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…

Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate. Read More…

Stephen Olsen

Contributors

Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he will be Acting Director from January to June 2019. Read More…

Designated Order Authors

Samantha Galvin

Samantha Galvin is an Assistant Professor of the Practice of Taxation and the Assistant Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues. Read More…

William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors. Read More…

Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today. Read More…

Patrick Thomas

Patrick W. Thomas is the founding director of Notre Dame Law School’s Tax Clinic, in which he trains and supervises law students representing low-income clients in disputes with the Internal Revenue Service. Prior to joining the law school faculty in 2016, he received an ABA Tax Section Public Service Fellowship to work as a staff attorney for the LITC at the Neighborhood Christian Legal Clinic in Indianapolis. Read More…

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